Mark Nelson reviews the economic report released in Hammond’s UK Budget for 2017
Alongside Wednesday’s Budget, the UK’s Office of Budget Responsibility provided its latest economic and fiscal outlook. The report was relatively mixed as growth projections were upgraded for some years and downgraded for others, whilst the OBR flagged limits to the recent strength in consumer spending in light of rising inflation and lethargic wage growth.
Regarding economic growth, the OBR revealed that their first estimates indicated that the UK economy grew by 1.8% in 2016, the second fastest pace of all G7 economies, but was down from their 2.0% estimate at the time of the Autumn Statement in November. Despite the downgrade, the OBR remarked that growth momentum had picked up at the end of the year, driven by stronger-than-expected consumer spending; this momentum saw them upgrade their GDP forecast for this year to 2.0% from November’s estimate of 1.4%. UK economic growth is then expected to slow to a trough in 2018 of 1.6%, before picking up again from 2019 through 2021.
“Regarding economic growth, the OBR revealed that their first estimates indicated that the UK economy grew by 1.8% in 2016, the second fastest pace of all G7 economies”
Inflation, according to the OBR, has picked up recently as the effects of a weaker pound has fed through to import prices and subsequently consumer prices. These rising prices, in the absence of an equal increase in earnings, have meant that the rise in consumer spending towards the end of the year was fuelled by the UK public saving less during 2016. The saving ratio – the percentage of disposable income saved, excluding pension saving – fell to 0.6% in the third quarter of 2016 and then into negative territory in the fourth quarter, indicating that UK households are either borrowing to spend or eating into their savings. The OBR stated that this “cannot continue”. Although we may see consumer spending tail off, business investment may take up some of the slack. Business investment was weak in 2016, as had been expected, with companies reluctant to spend in the wake of the UK’s decision to exit the EU. With Article 50 set to be triggered later this month, the OBR expects business investment to begin to strengthen from the third quarter of the year.
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